PPPs in the age of Duterte

A focus on quality, a streamlined approach and a strong pipeline are cause for optimism. But Pillsbury associate Golda Calonge warns it’s not all plain sailing for investors interested in the Philippines.

In what is now considered landmark legislation, the Philippines Foreign Investments Act of 1991 liberalised entry of foreign investments into the country to the fullest extent of the law. Though the stated policy is to attract, promote, and welcome productive investments from foreign individuals and institutions, successive presidential administrations have struggled to draw and sustain infrastructure investments in the past.

In order to contextualise the potential impact of Philippines President Rodrigo Duterte’s administration on infrastructure projects in that country, it is important to understand the challenges faced by him and his predecessor with respect to shepherding public-private partnerships.

Early in his administration, President Benigno Acquino III expressed a commitment to developing infrastructure to support the country’s growing energy consumption and need for reliable transportation systems. As his administration progressed, Acquino suffered from a corruption scandal that brought his efforts to a standstill. Furthermore, reported in-fighting among various stakeholders and arduously slow reimbursement processes made the Philippine market less desirable to prospective investors and service providers.

Upon becoming president, Duterte proposed a 10-point socio-economic agenda that included closing the country’s infrastructure gap with an emphasis on PPPs. The agenda intends to accelerate infrastructure spending to account for 5 percent of the Philippines’ GDP. In a departure from the Acquino administration’s approach, Duterte hopes to streamline the PPP process to attract foreign investment.

A focus on quality

Whereas the Acquino administration generally awarded projects to the lowest bidders, Duterte has stated that he seeks to focus on quality infrastructure schemes rather than low costs. The Duterte administration has already approved infrastructure projects worth approximately 1.24 trillion pesos ($23 billion; €19 billion) in less than two years. This figure outpaces the value of the projects approved by the Acquino administration during six years in office. However, it is unclear whether quality and low costs are mutually exclusive.

Among the big-ticket projects that the Duterte administration has approved are (note: conversions from Philippine pesos to US dollars are based on current exchange rates):

North-South Commuter Railway – 285 billion pesos ($5.5 billion)

PNR South Commuter Line – 134 billion pesos ($2.6 billion)

Mega Manila Subway – 134 billion pesos ($2.6 billion)

Malolos-Clark Rail – 211.46 billion pesos ($4 billion)

Binondo-Intramuros Bridge – 4.61 billion pesos ($ 88 million)

Estrella-Pantaleon – 1.38 billion pesos ($26.5 million)

Construction of approximately 30 bridges throughout the islands  – 11.37 billion pesos ($218.75 million)

Tagum-Davos-Digos (Phase 1 of the Mindano Railway Project) – 35.36 billion pesos ($680 million)

These projects are mostly concentrated in the capital of Manila where there is an acute desire to alleviate traffic congestion. Nevertheless, the Duterte administration aims to improve transportation infrastructure throughout the nation to make the islands more interconnected.

“Whereas the Acquino administration generally awarded projects to the lowest bidders, Duterte has stated that he seeks to focus on quality infrastructure schemes rather than
low costs”
Calonge

Conglomerates play an increasingly large role in developing infrastructure aimed at improving transportation and supplying energy in the Philippines. Among the key players are San Miguel, Ayala, Metro Pacific and SM Investments. Philippine companies are also in the process of presenting turnkey projects to the government. Turnkey projects are packaged to include both partnerships with contractors as well as financing. To be considered, prospective contractors can apply to packaged projects offered to the government, whether through a bidding process or an unsolicited proposal.

In addition, the Philippines is in need of infrastructure to improve telecommunications capacity. The internet can be slow and expensive in parts of the country. Broadband capabilities, increased access and reduced costs are all priorities. As a result of the administration’s increased interest, carriers such as China Telecom, Korea Telecom and Docomo are conducting research aimed at developing new business opportunities in the country.

Complicating factors

While the increased financing and further streamlined approach to expanding PPPs in the Philippines bring optimism, there are several complicating factors for the Philippine government and the international community to consider. Though there are promising infrastructure opportunities in the energy, transportation and telecommunications sectors, there are also concerns about the prospect of the Philippines becoming encumbered by unwieldy debt obligations and the international community’s attitude toward an administration accused of human rights violations.

Some parallels may be drawn between the Philippines and Sri Lanka, another island nation that has invested in big-ticket infrastructure projects. Sri Lanka is now suffering from a debt crisis stemming from large projects, such as the creation of a new airport that only serves several hundred passengers a week and the construction of expensive highways. An instance of a costly project that has not lived up to expectations is the Hambantota port, which was financed by Chinese investment. Hambantota was built to ease the demands on the Colombo port, one of the busiest container terminals in Asia. Despite the intention, Hambantota port did not become the industrial hub the Sri Lankan government envisioned.

For Sri Lanka to pay down the $8 billion owed to Chinese lenders and contractors for the financing and construction, Sri Lanka has signed an agreement to give the counterparties a stake in the port. An estimated 95 percent of all government revenues go towards debt repayment, which stands at about $64 billion. The case of Sri Lanka highlights the difficulty for countries to open themselves up to foreign investment without compromising their fiscal wellbeing. The Philippines may do well to take heed of the current debt crisis in Sri Lanka.

And despite the potential of the Duterte administration to improve interconnectivity throughout and between the islands, the president’s record on the rule of law undermines efforts to modernise and democratise the country.

Duterte’s strong-handed anti-drug campaign encourages law enforcement to resort to and initiate violence. According to Human Rights Watch’s World Report 2018, data from the Philippine Drug Enforcement Agency indicate police operations led to the deaths of more than 3,900 suspected drug users and dealers between July 2016 (when Duterte took office) and September 2017.

Taking into account credible media reports of killings by “unidentified gunmen” during that period, the total increases to more than 12,000, according to Human Rights Watch research. The international community’s highlighting of alleged human rights violations throughout his administration gives foreign investors pause for thought when considering whether to enter into transactions with the Philippine government.

Conclusion

The Duterte administration’s efforts to encourage and promote infrastructure projects in the Philippines ushers in a new era in which the government welcomes private investment with newfound resolve. Nevertheless, the current debt crisis in Sri Lanka sheds light on the potential negative outcomes that the Philippines could face if the government does not carefully weigh the risks of entering debt transactions to fund billion-peso projects.

Furthermore, human rights and commercial factors enter into investors’ calculations when considering whether they are willing to do business with an administration known by the international community for the execution of extrajudicial killings.

Although the Duterte administration has a reputation for the president’s determination to follow through on his agenda, the potential of infrastructure projects to modernise the Philippines and connect the archipelago’s diverse inhabitants could be compromised because of the administration’s penchant for taking unnecessary risks and failing to follow the rule of law.

Write to the author at golda.calonge@pillsburylaw.com